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The RAC program looks for any situations in which there have been overpayments and, theoretically, underpayments.  Overpayments or more generally incorrect payments can occur for a multitude of reasons.  Consider the fundamental model for Medicare or some other third-party payer adjudicating a claim and making payment.  Generally, here are the concerns:


  • Covered Individual
  • Covered Service or Item
  • Ordered by a Physician or Qualified Practitioner
  • Medically Necessary
  • Provided by Qualified Healthcare Personnel
  • Appropriate Written Documentation
  • Proper Claim Filed Timely


You can add or modify to this set of criteria based upon specific circumstances.  One of the major areas for RAC reviews is that of medical necessity.  Was the service really medically necessary?  Did the documentation establish medical necessity?  Was the site of service medically necessary or could the service have been provided in a less expensive setting? These questions surrounding medical necessity then bring us into another area, namely that of payment system interfaces. The Medicare program has many different payment systems that are often developed and based upon different approaches. The same service can sometimes fall under two different payment systems with very different reimbursement levels.


One place to look for issues that might be addressed by the RACs is to look at this sequence of criteria for payment listed above and to then follow any associated areas in which CMS is issuing new guidance or clarifying guidance.


Note: Section 903 of the Medicare Modernization Act of 2003 (MMA 2003) contains a provision that does not allow CMS to retroactively apply any rules, regulation and/or interpretation that represents a substantive change.  Recently, as you read through the various pronouncements from CMS you are likely to see phrases such as:

“Our [CMS] interpretation is, and always has been, …” Or
“This is clarifying guidance that does not change our interpretation.”


When you read and study some of the newer guidance you may find yourself questioning whether this really is new guidance and that it does indeed represent substantive change.


For this article, let us consider the general issue of services being provided by qualified personnel.  In some settings this means personnel other than a physician or qualified practitioner.  Thus we are immediately taken into the realm of supervision.  More specific is the key phrase direct physician supervision.


Under certain circumstances, personnel other than a physician or practitioner may provide healthcare services as long as there is direct physician supervision.  If for some reason, the supervision is not present, then the services become non-covered.  If such services are provided and paid by the Medicare program and then it is determined that the supervision requirement was not present, then auditors will claim that an overpayment has occurred.


There are two different settings in which direct physician supervision becomes an issue:

  • Freestanding Clinics
  • Provider-Based Organizations


For the Medicare program, freestanding clinics file only the CMS-1500 or professional claim form.  These clinics are generally owned and operated by physicians, but entities such as hospitals also have freestanding clinics, often networks of freestanding clinics.


Provider-based organizations, including clinics and associated operations, are under the auspices of a main provider, typically a hospital.  Provider-based status means that all the conditions and criteria under the so-called provider-based rule (PBR) are being met.  See 42 CFR §413.65.  Operationally, provider-based organizations file the technical component UB-04 or CMS-1450 claim form.  Depending upon the operation, there may also be a corresponding CMS-1500 claim form filed for professional services.


For both freestanding and provider-based operations, some degree of physician supervisions is required.  For our purposes, we will hone in on the provider-based supervision requirements because there have been changes in the supervision requirements and these changes, if applied retroactively, could become RAC issues claiming overpayments.


Supervisions Requirements Based On Location

Relative to a main provider, a provider-based operation can be in three different relative locations:

  • Inside the hospital
  • On the campus of the hospital
  • Off the campus of the hospital


The Infusion Center


As an example, we will use the Infusion Center at the fictitious Apex Medical Center.  The Infusion Center provides infusions, injections, blood transfusions, chemotherapy and other associated services.  Patients present with physician orders and services are provided by specially training nursing staff.  For our purposes, the Infusion Center can be located in any of the three relative locations.  The Infusion Center is provider-based in any of the locations because all of the criteria enumerated in the provider-based rule are being met, a UB-04 claim form is filed and the Infusion Center is on the Medicare cost report.


During the initial stages when CMS implemented the PBR, 42 CFR §410.27 was revised to require direct physician supervision for provider-based situations.  In the April 7, 2000 Federal Register (65 FR 18524), CMS clearly indicates that the applicability of this direct physician supervision requirement was only for off-campus provider based operations; operations that were on-campus or in the hospital met this requirement because a physician or qualified practitioner was presumed to be available in case of emergencies or complications.


In Transmittal 82, to the Medicare Benefits Policy Manual, dated February 8, 2008, CMS provided additional clarifying guidance.  The change in the manual now appears to require direct physician supervisions of the treating physician for on-campus provider-based operations.


From the Medicare Benefit Policy Manual, §20.5.1- Coverage of Outpatient Therapeutic Services Incident to a Physician’s Service Furnished on or After August 1, 2000, we have:


“The physician supervision requirement is generally assumed to be met where the services are performed on hospital premises. The hospital medical staff that supervises the services need not be in the same department as the ordering physician. However, if the services are furnished at a department of the hospital which has provider-based status in relation to the hospital under 42 CFR 413.65 of the Code of Federal Regulations, the services must be rendered under the direct supervision of a physician who is treating the patient. “Direct supervision” means the physician must be present and on the premises of the location and immediately available to furnish assistance and direction throughout the performance of the procedure. It does not mean that the physician must be present in the room when the procedure is performed.”


There are some disturbing questions relative to this changed manual entry:


  • By title this manual entry appears to apply back to August 1, 2000.
  • CMS indicates in the first sentence that physician supervision is generally assumed on the hospital premises.
    What are premises? Does this include the campus?
  • Direct physician supervision is required if the department has provider-based status. Does this include departments (organizations, facilities, etc.) inside the hospital?


This manual change is also discussed in both the July 18, 2008 Federal Register (73 FR 41518) and the November 28, 2008 Federal Register (73 FR 68702).  In these entries CMS reaffirms that the direct supervision guidance is not only for off-campus situations, but this requirement is also for on-campus situations.  CMS also asserts that this is not a change in their guidance.


Hospitals with provider-based operations may have relied on the April 7, 2000 Federal Register guidance for supervision requirements for on-campus (but out of hospital) operations.  In the preamble language CMS indicates that physician supervisions for in-hospital or on-campus operations is presumed.  From Page 18525:


“We emphasize that our proposed amendment of § 410.27 to require direct supervision of hospital services furnished incident to a physician service to outpatients applies to services furnished at an entity that is located off the campus of a hospital that we designate as having provider-based status as a department of a hospital in accordance with the provisions of § 413.65. Our proposed amendment of § 410.27 to require direct supervision of hospital services furnished incident to a physician service to outpatients does not apply to services furnished in a department of a hospital that is located on the campus of that hospital. For hospital services furnished incident to a physician service to outpatients in a department of a hospital that is located on the campus of the hospital, we assume the direct supervision requirement to be met …” (65 FR 18525)


Let us return to the Apex Medical Center’s Infusion Center.


  • If the Infusion Center is off-campus, then direct physician supervisions is and has always been required.  A physician or qualified non-physician practitioner should always be present and their presence should be documented through time logs, sign-in sheets and/or any other appropriate documentation system.
  • If the Infusion Center is on-campus, but out of the hospital, it is quite likely that Apex has not monitored the presence of a physician or practitioner during all the operations.  In many cases, there may not have been a physician in the Infusion Center itself.  However, physicians would have been readily available if needed because the center in on the hospital campus.
  • If the Infusion Center is in the hospital, we again have the situation that there may not have been a physician in the Infusions Center itself, but physicians would be available if needed.


The overpayment issue is that Apex may not have met the direct physician supervisions requirement for on-campus provider-based operations.  If any services were provided during time periods in which there was no direct physician supervision, then all of the payments for these services would be deemed overpayments.


Given that CMS has changed the interpretation of supervision for on-campus provider-based situations (although CMS claims this is not a change) and that this change represents the guidance from the beginning of APCs, RAC auditors will certainly claim that they can go back to October 1, 2007 in assessing possible overpayments in these situations.


Bottom-Line: Hospitals should carefully assess any and all provider-based operations (facilities, organizations, etc.) that are on-campus but out of the hospital relative to direct physician supervisions and the hospital’s ability to assert and document such supervision.  Given all of the ambiguities in this area, in-hospital operations should also be reviewed as a precautionary measure.  For off-campus operations, the supervisory requirements have been well known, but hospitals may also want to check for documentation of when a physician or practitioner is actually present.


See Transmittal 87 to the Medicare Benefit Policy Manual issued on May 2, 2008 which was within weeks rescinded.  This Transmittal does give some insight into how CMS is approaching freestanding clinics.


We leave it to the reader to determine if the guidance is clear.


Readers are encouraged to read these sections and then determine whether there has been a substantive change in guidance from CMS.


Duane C. Abbey is president of Abbey & Abbey, Consultants, Inc.

About the AuthorEMail the Author


Duane C. Abbey, PhD, CFP

Duane C. Abbey, PhD, CFP, is an educator, author, and management consultant working in the healthcare field. He is president of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University. Dr. Abbey is a member of the RACmonitor editorial board and is a frequent guest on Monitor Mondays.

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